ANJAPPAN RANGASAMY,CHENNAI vs. DCIT, CENTRAL CIORCLE-1(3_, CHENNAI

4. On the facts and circumstances that the Ld.CIT(A) was erred in not allowing the deduction of u/s 80C of the Act, amounting to Rs.1,00,000/- by way of principal repayment housing loan under self occupied propriety.

5. On the facts and circumstances that the Ld.CIT(A) was erred in not allowing the exemption u/s 54 of the Income-tax Act, 1961, amounting to Rs.73,72,048/-

6. That the Ld. CIT(A) was erred in not allowing the withholding tax credit u/s. 90A of the Income Tax Act, 1961, amounting to Rs.9,19,124/-.

As is evident, the issues that fall for our consideration are – (i) Disallowance of interest on borrowings; (ii) Deduction of interest on housing loan; (iii) Deduction u/s 80C; (iv) Claim of deduction u/s 54; (v) Foreign Tax Credit. 1.3 The Ld. AR advanced arguments by taking support of various documents as placed on record. The issue-wise chart, for all the years, has been placed on record. The Ld. CIT-DR submitted that impugned order is a reasonable order which do not require any further interference on our part. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 2.1 The assessee is stated to be engaged in hospitality business (M/s Anjappar Chettinad A/c Restaurant). The assessee was subjected to search u/s 132 on 03-01-2019 and accordingly, notice u/s 153A was issued on 18-10-2019.The assessee admitted income of Rs.9.39 Lacs. It was noted by Ld. AO that total receipts were Rs.52.08 Lacs. The receipts, as per assessee’s reply, were Rs.61.27 Lacs. However, the assessee offered net income of Rs.10.89 Lacs after claiming expenditure like interest on bank loan and salary to staff. 2.2 In support of interest expenditure, it was stated that the assessee availed business loan of Rs.200 Lacs from M/s Sundaram Finance Ltd. and the loan was secured by hypothecation of land. The said loan was utilized for the purpose of running the business operations. The assessee made supplier’s payments towards purchase of material relating to food processing. The assessee submitted that it made payment of staff salaries and various other operating expenses. The assessee also produced copies of bank statement etc. Besides this, the assessee also claimed advances written off as expenditure. 2.3 However, Ld. AO held that the assessee could not claim any such expenditure since he never filed regular return of income and therefore, no expenditure and deductions could be allowed to the assessee. Accordingly, entire receipts of Rs.61.27 Lacs were considered to be the income of the assessee. 2.4 The assessee claimed deduction u/s 54 against sale of certain immoveable property. The same was on account of the fact that the assessee purchased a property in the name of his daughter Smt. Priyankaa. The assessee submitted that source of funds belonged to the assessee only. The assessee obtained loan which was repaid on monthly EMI basis. The assessee also claimed deduction u/s 24(b) and deduction u/s 80C for repayment of principal and interest of housing loan repayment. However, Ld. AO denied deduction u/s 54 for Rs.73.72 Lacs as claimed by the assessee. The deduction claimed u/s 24(b) as well as u/s 80C was also denied. Aggrieved, the assessee assailed the assessment order before first appellate authority. Appellate Proceedings 3.1 The assessee assailed the impugned additions which have been adjudicated by Ld. CIT(A) from Page No.15 onwards. The Ld. CIT(A) noted that the assessee did not file return of income u/s 139(1) or u/s 139(4) for any of the assessment years The returns were filed for the first time in response to notice u/s 153A. However, Ld. CIT(A) held that tax is to be levied on undisclosed income and not on the gross receipts. There was no bar in claiming the expenditure in the returns filed u/s 153A provided the same was allowable as per law. After perusal of financial statements, it was noted that the assessee was in receipt of royalty income and interest income from bank. Royalty income was based on turnover of the respective concerns from where royalty was received and therefore, the expenses relating to earning of royalty alone would be allowable to the assessee. The assessee has to incur expenditure to maintain office, travel to franchises, maintain staff and incur salary payments which would be incidental to the running of the office for earning the royalty income. However, the expenditure like interest on non-housing loan, bad-debts, interest paid, amounts written-off could not be allowed as deduction since that do not have any nexus with the royalty income earned by the assessee. Accordingly, disallowance of interest expenditure of Rs.28.31 Lacs was confirmed. The same included interest on housing loan for Rs.28.20 Lacs.

3.2 On the issue of deduction u/s 54 for Rs.73.72 Lacs, it was noted that the assessee sold a land and purchased another property in the name of his daughter and claimed deduction u/s 54. It was noted that the loan was taken from M/s Sundaram Finance Ltd. in the name of the daughter where the assessee was a co-guarantor. The EMI payments were made by the assessee. The property was subsequently settled in the name of the assessee vide settlement deed dated 28-03-2022 by his daughter which was mere after-thought. The assessee relied on the decisions of Chennai Tribunal in Smt. A.Tamil Ponni vs ITO (ITA No.3112/Chny/2019; 25-02-2020) which, in turn, relied upon the decision of Hon’ble High Court of Madras in the case of V. Natarajan (287 ITR 271). Reference was made to various other decisions. However, Ld. CIT(A) referred to the decision of Tribunal in D.Devdass (ITA No.2047/Mds/2015; 07-04-2016) and confirmed the denial of deduction. Consequently, the denial of deduction u/s 24(b) as well as u/s 80C was also confirmed. 3.3 The credit of foreign tax payment was denied by Ld. AO. The Ld. CIT(A) held that in terms of Rule 128, the assessee was required to make the claim within the due date of filing of return of income. The assessee did not make this claim by filing Form 67 within the aforesaid time which is mandatory. Accordingly, the action of Ld. AO was confirmed. 3.4 Aggrieved as aforesaid, the assessee is in further appeal before us. Our findings and Adjudication 4. From the financial statements as placed on record, it could be seen that for this year, the assessee is having secured loans of Rs.194.85 Lacs which include outstanding loan against M/s Sundaram Finance for Rs.191.27 Lacs. As against this, the assessee has advance loans to various parties which include advance to M/s Anjappar A/c Chettinad Restaurant, M/s PVR Foods and Mr. Sivakumar. All these loans pertain to business transactions carried out by the assessee. The assessee has claimed interest on non-housing loan for Rs.28.20 Lacs. The loan was obtained against hypothecation of land and it was utilized to run business operations and paid towards new projects. We are of the considered opinion that once business nexus is established then the expenditure incurred in that respect could not be denied to the assessee. The ratio of decision of Hon’ble Supreme Court in the case of S.A. Builders Limited vs. CIT (2007) 288 ITR 1 would apply wherein it was held that once commercial expediency is established, the expenditure would be allowable to the assessee. Drawing strength from the same, we would hold that the assessee would be eligible to claim such expenditure. The Ld. AO is directed to allow impugned expenditure of Rs.28.20 Lacs. This issue arises in all the other years also and accordingly, the same stand decided in assessee’s favor in all the years. The corresponding grounds of appeal for AYs 2013-14 to 2019-20 stands allowed.

5. So far as the claim of deduction u/s 54 is concerned, it has rightly been pointed out by Ld. CIT-DR that the assessee has sold a land and therefore, no such deduction u/s 54 could be allowed to the assessee and the deduction, if at all, has to be considered in terms of Sec.54F. The aforesaid fact could not be controverted by Ld. AR. Clearly, the deduction is not admissible u/s 54. However, the same has to be adjudged in terms of provisions of Sec.54F. The Ld. CIT-DR has submitted that the investment was made in the name of assessee’s daughter and therefore, the deduction is not to be allowed. However, Ld. AR has submitted that the investment has been sourced by the assessee and EMI payments were also being advanced by the assessee. We are of the considered opinion that the provisions of Sec.54F are beneficial provisions and the same should be liberally construed in favor of the assessee. Once the investment has been sourced by the assessee, the benefit thereof would be available to the assessee. The decision of Hon’ble High Court of Delhi in CIT vs. Ravinder Kumar Arora [2011] 15 Taxmann.com 307 supports our view. In this case, the investment was made by the assessee jointly with his wife. The Ld. AO restricted the deduction to the extent of 50%. However, Tribunal allowed full deduction and Hon’ble High Court upheld the action of Tribunal. We are of the considered opinion that similar ratio would apply here. Similar is the decision of Bangalore Tribunal in Shri Krishnappa Jayaramaiah (ITA No.405/Bang/2020; 22-02-2021) wherein the property was purchased in the name of married widowed daughter of the assessee. The bench applied the ratio of decision of Hon’ble High Court of Madras in the case of V. Natarajan (287 ITR 271) as well as the decision of Hon’ble Punjab & Haryana High Court in the case of Gurnam Singh (327 ITR 278); the decision of Hon’ble A.P.High Court in the case of Late Gulam Ali Khan (165 ITR 228) and decided similar issue in assessee’s favor. The Ld. CIT-DR has referred to the decision of Hon’ble High Court of Punjab & Haryana in the case of Dinesh Verma (60 Taxmann.com 461). Upon perusal of para-18 of the decision, it could be seen that it was the wife who had invested the amount herself. The same is not the case here. The decision of Pune Tribunal in the case of Sakharam Bhondve (ITA No.951/Pun/2019 dated 06-01-2020) is a decision of single member. The decision of Hon’ble High Court of Bombay, Nagpur Bench in the case of Prakash (173 Taxmann.com 311) is a decision against the assessee. However, the ratio of decision of jurisdictional High Court in the case of V. Natarajan (supra) is binding on us.

, for AYs 2014-15 to 2019-20 stands allowed to that extent.

7. We find that the issue of foreign tax credit is covered in assessee’s favor by the decision of this Tribunal in the case of ITO vs. Smt. Chengam Durga (ITA No.1491/Chny/2023 dated 08-04-2024). The bench considering the decision of Hon’ble High Court of Madras in the case of Duraiswamy Kumaraswamy (WP No.5834 of 2022 & ors. order dated 06.10.2023) held that Filing of this form in terms of Rule 128 was only directory in nature. The rule is only for the implementation of the provisions of the act and it would always be directory in nature. Respectfully following the same, we direct Ld. AO to grant impugned Foreign Tax Credit to the assessee after verifying Form No.67. This issue arises in all the other years also. Accordingly, the corresponding grounds, for AYs 2013-14 to 2019-20 stands allowed.

8. The appeal for AY 2014-15 stands allowed for statistical purposes in terms of our above order. The only issue in AY 2013-14 is interest on loan and foreign tax credit which has already been adjudicated. The issue of bad-debts written-off for Rs.1 Lacs has not been pressed by Ld. AR. The appeal for AY 2013-14 stands partly allowed. Assessment Year 2015-16 9.1 In AY 2015-16, the only issue which has remained to the adjudicated is disallowance of expenditure of Rs.46.23 Lacs which represent embezzlement of funds by the staff. The Ld. AO, in para 4.7 of the order for AY 2015-16, denied this expenditure. This issue has been dealt with by Ld. CIT(A) at para 6.4 in the impugned order. 9.2 It was submitted by the assessee that the accountant of the assessee by the name Mr. Sivakumar made embezzlement of assessee’s accounts through blank cheques which were given by the assessee in good faith. In support, the assessee provided written statement from Mr. Sivakumar and claimed the same as business deduction. Since the assessee did not furnish any proof of legal action or copies of FIR, the same were held to be non-genuine. The assessee referred to CBDT Circular No.35-D (XLVII-20) dated 24-11-1965 holding that loss by embezzlement by employees should be treated as an incidental to business and this should be allowed as deduction in the year in which it was discovered. The aforesaid circular was issued by considering the decisions of Hon’ble Supreme Court in the case of Badridas Naga (34 ITR 10) and Associated Banking Corp. of India Ltd. (56 ITR 1).

9.3 However, Ld. CIT(A) chose to confirm the action of Ld. AO on the ground that the assessee has not produced acceptable evidences. Further, the assessee could not establish that the said embezzlement happened out of royalty income and not out of other capital funds. Therefore, such a loss could not be allowed u/s 37 or any other provision. Aggrieved as aforesaid, the assessee is in further appeal before us. 9.4 Upon perusal of ledger account of Mr. Sivakumar as placed on Page No.11 of the paper-book, it could be seen that the embezzlement has happened starting from October, 2012 to March, 2015. The assessee has written-off an amount of Rs.46.23 Lacs on 31-03-2015. The relevant bank statements have also been placed on record which would show that the embezzlement has happened by way of issuance of demand drafts / Pay orders from the bank accounts. The assessee, upon discovering embezzlement, has issued legal notice to Mr. Sivakumar on 05-03-2015 (Page No.9-10 of paper-book). Mr. Sivakumar has accepted the embezzlement (translated version of statement is placed on page no. 25 of the paper-book) and accepted manipulation of Rs.50 Lacs. It has been admitted that the amounts have been withdrawn by way of demand drafts and cash withdrawal. Further, certain sum has been transferred to his friend’s accounts. The perusal of these documents would lend credence to the case of the assessee. Considering the fact that Mr. Sivakumar was handling bank accounts and also holding signed blank cheques and carrying business operations for the assessee, it was quite possible that the assessee refrained from filing FIR / Police Action against the said person. Nevertheless, the fact of embezzlement during the course of business has been established. It was immaterial whether the embezzlement was out of loans or out of royalty income. The same has happened during the course of business. In such a case, the same would be allowable u/s 37(1) and business loss. The aforesaid case laws as well as CBDT Circular support the said claim. The Hon’ble Supreme Court in the case of Badridas Naga (supra) held that where a person who was in charge of business having authority to operate bank accounts and that he withdrew money in purported exercise of that authority then he would act as agent and loss resulting from misappropriation of funds by him would be a loss incidental to carrying on of the business. Such a loss would be allowable deduction. This principle applies to the facts of the present case. Therefore, we direct Ld. AO to allow this claim. 9.5 The appeal stands allowed for statistical purposes in terms of our above order. Assessment Year 2016-17 10.1 In AY 2016-17, the only issues which have remained to the adjudicated is claim of advances written-off for Rs.51.50 Lacs and addition towards excess gross receipts. 10.2 The Ld. AO has denied claim of advances written-off for Rs.51.50 Lacs against a partnership firm M/s PVR Foods. The assessee is stated to have paid advances of Rs.100 Lacs and Rs.3 Lacs to this firm during FY 2013-14 as trade advances for running of hotels in the name of PVR foods. A settlement amount of Rs.40 Lacs was also given on 10-09-2014 for not using the franchise rights under the brand name ‘Anjappar’ vide cancellation agreement dated 09-09-2014. The assessee claimed the same on the ground that the same were trade advances and non- recoverable and hence, allowable as business deduction. Reliance was placed on the decision of Hon’ble Supreme Court in the case of Mysore Sugars Co. Ltd. (46 ITR 649). The Ld. CIT(A) upheld the disallowance on the ground that the assessee had intention of venturing into the hotel business and made investment out of borrowing from M/s Sundaram Finance. The payment had no nexus with the business of the assessee. This was a capital investment and such loss would be capital loss. Aggrieved, the assessee is in further appeal before us. 10.3 Upon perusal of ledger extracts of M/s PVR Foods as placed on record, it could be seen that the assessee has made investment in this firm as business venture. As per the findings of Ld. CIT(A), the assessee intended to venture into a hotel business and made investment. The advances were lost and could not be recovered by the assessee. We are of the opinion that since the assessee was already engaged in hotel business on franchise model basis and the new investment was in furtherance of existing business interest of the assessee, it could be said that the aforesaid loss has arisen in the course of business operations. The investment was made in the ordinary course in furtherance of business interest of the assessee. 10.4 The Ld. CIT-DR has referred to the decision of Hon’ble Supreme Court in the case of Khyati Realtors Pvt. Ltd. (141 Taxmann.com 461) to support the case of the revenue. However, the same is distinguishable on facts. In that case, the assessee was engaged in real estate and financing. It failed to prove that the amount paid to developer as advance for booking of commercial space was in its ordinary course of business. The same is not the case here since the Ld. CIT(A) has held the loss to be capital in nature since it was capital investment for the assessee.

10.5 Therefore, considering the facts and circumstances of the case, we direct Ld. AO to allow this expenditure. This issue arises in AY 2017-18 also and the same stand allowed accordingly. 10.6 The remaining issue is addition towards gross receipts of Rs.11.20 Lacs. The same arises from the fact that Ld. AO quantified receipts of Rs.160.17 Lacs whereas the assessee reflected receipts of Rs.148.96 Lacs. Before us, no plausible explanation could be furnished in support of receipts as reflected by the assessee. Therefore, no indulgence is required on this issue. 10.7 The appeal for AY 2016-17 stands partly allowed for statistical purposes. The appeal for AY 2017-18 stands allowed for statistical purposes in terms of our above order. 10.8 In AY 2018-19, the only issue is interest on loan, deduction u/s 24(b) and 80C and foreign tax credit. All these issues have already been adjudicated. The appeal for this year stand allowed for statistical purposes accordingly. Assessment Year 2019-20 11.1 In AY 2019-20, the only issue that has remained to be adjudicated is addition of unexplained jewellery u/s 69A. The Ld. AO proceeded to add seized jewellery of 1394.50 grams to the income of the assessee. The assessee provided purchase bills for 1304.87 grams. It was seen that 526.48 grams of jewellery belonged to family members and no justification could be given for 868.02 grams of jewellery. Accordingly, the same was added to the income of the assessee u/s 69A. During appellate proceedings, the assessee claimed that 89.63 grams of jewellery belonged to the wife as stridhan whereas 1304.87 grams of jewellery belonged to his daughter which was received at the time of her marriage. Considering the social status of the assessee as well as customary practices, Ld. CIT(A) allowed claim of 89.63 grams of jewellery with respect to wife and 400 grams of jewellery in the hands of the daughter. The addition thus sustained was to the extent of 378.39 grams of jewellery. Aggrieved as aforesaid, the assessee is in further appeal before us. The Ld. AR seeks concession in terms of CBDT Instruction No.1916 dated 11-05-1994. 11.2 We find that this issue has been decided by us favorably in the case of Shri Anjappan Kandasamy (ITA Nos.459/Chny/2024 & ors. dated 03-07-2024) as under: - 5.6 So far as the addition of jewellery is concerned, we find that the case law of Hon’ble High Court of Madras in the case of V.G.P.Ravidas (51 Taxmann.com 16) deals with a case of wealth tax payee wherein it was required of him to specifically show the source of jewellery found in excess of what was declared in the respective wealth tax returns. In fact, CBDT circular dated 11-05-1994 specifically contains para (ii) which prescribes that in the case of wealth tax assessee gold jewellery and ornaments found in excess of the gross weights declared in the wealth tax returns only need to be seized. Accordingly, the said case law would not apply as held by Mumbai Tribunal in Shri Ashok Jain vs. ACIT (ITA No.6251/Mum/2016 dated 25-05-2018), a copy of which has been placed on record. The co-ordinate bench distinguished aforesaid case law and finally held that the relief has to be granted to the assessee in terms of aforesaid circular of CBDT. Respectfully following the same, we would hold that the assessee would be entitled for benefit in terms of aforesaid circular. Considering the composition of family of the assessee, aforesaid concession comes to 1200 grams of jewellery which is way more than jewellery found during the course of search, Therefore, we delete the impugned addition. The corresponding grounds as well as the appeal stand allowed.

Therefore, by allowing the benefit of aforesaid instructions, we delete the impugned addition. The corresponding grounds stands allowed. 11.3 The appeal stands allowed for statistical purposes accordingly. Penalty Appeals : to 321/Chny/2024 for AYs 2013-14 to 2018-19 12.1 The Ld. AR has assailed the impugned penalties on legal grounds and filed additional grounds of appeal. The Ld. AR has submitted that in the absence of specific charge in the show-cause notice, no penalty could be levied and the orders are liable to be quashed. The Ld. CIT-DR, on the other hand, referred to the decision of Hon’ble High Court of Calcutta in the case of Thakur Prasad Sao & Sons Pvt. Ltd. (163 Taxmann.com 449) to plead that the notices issued by Ld. AO were perfectly valid in the eyes of law. However, it was admitted position that the adjudication in quantum appeals, on merits, would have direct bearing on consequential penalty. In this background, these appeals are disposed-off as under. 12.2 In AY 2013-14, the returned income of Rs.45.50 Lacs has been accepted by Ld. AO in the assessment order. However, since the assessee was non-filer, Ld. AO levied penalty of Rs.12.31 Lacs on the ground that the return u/s 153A was filed only after the search was conducted on the assessee. The Ld. CIT(A) confirmed the same. We find that, on similar facts, penalty has been deleted by us in the case of Shri Anjappan Maruthapandian (ITA Nos.461/Chny/2024 & ors. dated 03-07-2024) as under: - 5.2 From the facts, it is quite clear that returned income as filed by the assessee has finally been accepted by Ld.AO. The only reason to levy penalty is that such income is more than income previously reported by the assessee in original return of income. Nevertheless, in our considered opinion, the under-reporting of income has to be in the return of income filed by the assessee which fact is absent in the present case. The assessed income is nothing but returned income. Therefore, no case of under-reporting of income could be made out against the assessee. By deleting the impugned penalty, we allow the appeal of the assessee.

Taking the same view, we delete the penalty for AY 2013-14. 12.3 Facts are similar in AY 2014-15 wherein the penalty has been levied on assessed income of Rs.134.99 Lacs. The issue of capital gain as well as issue of interest on business loan has been decided by us in assessee’s favor in quantum appeal. The other business expenditure has already been allowed by first appellate authority. Accordingly, the penalty for this year would not survive. 12.4 In AY 2015-16, the Ld. AO has brought to tax gross receipts and levied penalty against the same. The Ld. first appellate authority partly allowed the claim of the assessee. The issues of interest on business loan as well as embezzlement of funds have been decided by us in assessee’s favor in quantum appeal. Accordingly, the penalty for this year would not survive. 12.5 In AY 2016-17, the Ld. AO has brought to tax gross receipts and levied penalty against the same. The Ld. CIT(A) partly allowed the claim of the assessee. The issues of interest on business loan as well as advances written-off have been decided by us in assessee’s favor in quantum appeal. The issue of addition of Rs.11.20 Lacs towards gross receipts was matter of reconciliation and therefore, no penalty could be levied against the same. Accordingly, the penalty for this year would not survive. 12.6 In AY 2017-18, the Ld. AO has brought to tax gross receipts and levied penalty against the same. The Ld. first appellate authority partly allowed the claim of the assessee. The issues of interest on business loan as well as advances written-off have been decided by us in assessee’s favor in quantum appeal. Accordingly, the penalty for this year would not survive. 12.7 In AY 2018-19, the Ld. AO has brought to tax gross receipts and levied penalty against the same. The Ld. first appellate authority partly allowed the claim of the assessee. The issue of interest on business loan has been decided by us in assessee’s favor in quantum appeal. Accordingly, the penalty for this year would not survive.

Order pronounced on 6th August, 2024